Bank Indonesia Holds Steady as it Keeps Watchful Eye on Rupiah

Dow Jones
09/23
 
 

Indonesia's central bank kept interest rates unchanged as it assesses the impact of rupiah support measures amid currency risks flaring again.

Bank Indonesia held its benchmark seven-day reverse repo rate at 5.75% on Wednesday, in line with expectations, following consecutive rate increases in May and June. Nine out of 10 economists polled by The Wall Street Journal expected no change, while one expected a 25-basis-point increase.

The central bank also kept its overnight deposit facility rate at 4.75% and its lending facility rate at 6.50%.

The move is consistent with our strategy to "stabilize the rupiah amid still-high external pressures, keep inflation within its 1.5%-3.5% target range for 2026 and 2027, and support continued economic growth," Gov. Destry Damayanti said at a press conference.

Bank Indonesia will also continue to strengthen policies to attract foreign capital inflows and maintain rupiah stability, as well as accelerate efforts to deepen the money and foreign-exchange markets, it said. Macroprudential and payment-system policies will remain focused on supporting economic growth, BI said.

The decision comes as the renewed escalation in the Middle East has pushed up energy prices, raising expectations that central banks will need to tighten further to keep price growth in check and currencies steady.

Both the Federal Reserve and the Bank of Japan raised rates last week.

Capital Economics said it expects Bank Indonesia to maintain its policy rate for the rest of the year, provided the recent rupiah weakness doesn't develop into a sharp selloff.

Inflation remains within the central bank's target range, reducing pressure for further tightening, economist Jason Tuvey said in a note. The rupiah faces renewed depreciation risks, however, and a rate hike is likely if currency pressures intensify, he said. For now, continued forex intervention and other measures should support rupiah stability, Tuvey said.

Barclays echoed the sentiment, saying it expects BI to leave its policy rate unchanged through the year-end and into 2027 if rupiah pressures stay contained. A narrower U.S.-Indonesia rate differential may make BI more cautious about cutting rates, particularly if the rupiah comes under renewed pressure, economist Brian Tan wrote.

Liquidity conditions are also expected to stabilize, he said, as the new finance minister, Suahasil Nazara, is unlikely to pursue further government cash injections into state-owned banks.

The finance minister's appointment was part of the latest cabinet shuffle under the Prabowo Subianto administration. The leadership changes have added policy uncertainty to an economy already dealing with currency weakness, elevated energy prices and an uncertain global interest-rate outlook.

RHB expects Indonesia's central bank to raise its policy rate by an additional 25 basis points to 6.00% this year, with the timing dependent on rupiah stability and capital flows, inflation persistence and domestic growth momentum.

A sharper and sustained rupiah depreciation or renewed foreign outflows could bring forward the hike, economist Wong Xian Yong said in a note. However, contained underlying inflation and moderating domestic growth should allow BI to be patient, he said.

 
 

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